Andrew Chen Archives

Doing a B2C is more fun than a B2B right?
A lot of folks are doing consumer internet startups because they think Web 2.0 startups are more fun. You can focus on the end user, make them happy, get traction, and go from there. Enterprise software companies (or their equivalent brethren, SaaS companies) are perceived as annoying because:

• You have to hire a big, inefficient sales team
• Your numbers depend on closing key deals (usually at the end of the quarter)
• You have to deal with annoying suit-wearing people who don’t talk geek
• You have to make your product better not through superior technology, but often through superior PR, sales operations, or other non-geek issues

Turns out that ultimately, you can’t escape all of the above, even in the consumer internet world. Let’s talk about why:

A quote from a guy who’s been there, done that
Ted Rheingold, CEO of Dogster and Catster, recently commented on post How NOT to calculate ad revenues:

I can still recall our early heady days when we forecast revenue
based upon our (over-calculated) pageviews and our expect (also
over-calculated) network CPM. You can imagine our frustration when the
network CPM was half what we hoped and they could only server us a
fraction of the impressions we requested. Note to anyone: only sites
with massive page serves can run a business on direct response ads.

In other words, unless you are a ridiculously huge consumer internet site, you have to build up your revenues through brand advertising sales. It’s very hard to just use ad networks like Google AdSense to sustain yourself – just do the math using 10 to 25 cent CPMs and you’ll quickly see why.

And brand advertising sales looks and feels exactly the same as enterprise sales, and has all the same annoying characteristics, including:

• You have to hire a big ad sales team, potentially with an expensive office in New York
• A small percentage of advertiser/agency relationships will supply a large chunk of your revenues. This means that "key deals" matter, and you will jump if they ask you to – for example University of Phoenix was worth $200MM/yr for AOL
• Everyone you talk to in the ad industry are not nerds – many come from traditional media backgrounds, again with a NY bias
• And fundamentally, brand advertising isn’t a tech game – it’s one based on great execution and great teams – so Silicon Valley tech companies often are at a disadvantage

The key thing here is: The users of your website are not really your customers.

Instead, the entire process of gathering eyeballs is just to sell to your ACTUAL customers, who are the ad agencies and advertisers. Get it? Your Web 2.0 consumer startup is actually a B2B that sells inventory to brand advertisers.

All your hard work is just to create B2B ad inventory
At an extreme, all the love and effort you put into your consumer internet product ultimately generates a commodity. All it does is generate ad impressions, which are sometimes rare enough to be sold at a premium to ad agencies. While many companies are able to exit with the monetization potential there, but not fulfilled (i.e. YouTube), for most companies that want to hit it big, they have to focus on the transition point between generating ad inventory and monetizing ad inventory.

This transition point is a big sticking point for companies, because the folks who are best at creating product specialize in consumer-centric skills like user experience, technology, and operations, whereas the skills needed for successful B2B ad sales revolve around issues like being able to sleep on airplanes, schmoozing with advertisers, speaking at panels, and other soft-skills.

How to avoid this mess
Of course, one way to completely sidestep these issues is to directly monetize your users – this is pretty hard, because you have to deal with transaction processing, coming up with something so compelling people will pay for it, and a number of other problems.

Net/net, the approaches here that align you directly with your customers are business models like:

• Subscriptions
• Virtual goods
• E-Commerce
• etc

While putting off ad monetization might be the easier thing to do in the short-run, the above business models may have useful characteristics of their own in the long-run.

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